Financial fraud is rampant but most people can't spot it: Survey

Report finds people find outsized return pitches "appealing"

Sep 12, 2013 @ 3:08 pm

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Most people in the United States have been targeted by financial fraudsters, while nearly half are unable to spot classic red flags of fraud.

For example, more than 40% of people surveyed for the Financial Fraud and Fraud Susceptibility in the United States report, which was released today, found an annual return of 110% for an investment to be appealing, while 43% felt that way about “fully guaranteed” investments.

“These outsized returns are highly improbable, as are any sort of guaranteed returns,” said Gerri Walsh, president of the Finra Investor Education Foundation, which issued the report.

“Bernie Madoff was offering guaranteed returns of 12%, which isn't even an outsized number,” Ms. Walsh said. “But the market conditions didn't matter. He was offering consistent annual returns.”

The survey found that more than 80% of respondents had been solicited to participate in potentially fraudulent financial schemes, while 40% could not identify some classic red flags of fraud.

The large share of Americans still attracted to persuasive conmen doesn't shock Ms. Walsh. What was more surprising to her was the extent to which defrauded investors underreported their status as victims.

Although 11% of respondents said they lost money when they were prompted by specific types of schemes (such as e-mail scams and free-lunch sales pitches), only 4% admitted to being a victim of a fraud when asked directly. “That's an estimated 60% underreporting rate,” she said.

Of those who admitted to being defrauded, 45% reported the fraud to someone, but the remainder found reasons not to. Among those who chose not report, the most common reason was, they didn't think it would have made a difference, followed by not knowing to whom they should turn. Embarrassment also played a key role in underreporting, according to the survey.

Though the report points to the elderly as easy targets for financial scams, the group willing to take the most risk in hopes of higher returns is well-represented among younger males with high income and education levels.

To combat the encroachment of schemers, the Financial Industry Regulatory Authority Inc. foundation has been engaged in an investor protection campaign for a number of years.

“The first thing consumers need to understand is that many of us are at risk, not just the little old ladies sitting at home all day without a lot of means,” Ms. Walsh said. “We're also trying to educate consumers about the power of persuasion.”

But there's still no tried-and-true method of foreseeing whether that glimmering investment is a diamond in the rough or just a piece of broken glass in the dirt. “When people look at financial fraud, hindsight's always 20/20,” she said.

The foundation surveyed nearly 2,400 U.S. adults 40 and older.

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